On 8/13/07, Julio Huato <[EMAIL PROTECTED]> wrote: > The second -- and really relevant -- issue is what happens to money > creation by each of these countries once you control for local > inflation. You don't have to use PPP. You can use any theory you > deem appropriate. Still, the fact is that largely -- as dd suggested > in a recent post -- these countries have sterilized forex injections > by holding them as reserves, keeping them in the USD economy (U.S. or > Eurodollar markets). Imagine the local inflation rates if they hadn't > sterilize export revenues or capital inflows.
Why would the local inflation rates increase if the central bank stops buying reserves? I'd think the opposite would happen: the local currency would appreciate causing exports to shrink and the economy to cool down bringing the inflation rate down not up. Two more points: 1) The emerging economies are only partially successful in sterilizing capital inflows. Hot money finds a way to sneak in despite the efforts of the central banks. 2) The Economist article exaggerates the degree of political independence of the US Federal reserve compared to the Reserve Bank of India and likely BoJ also. The political influence in the US is usually more indirect but it is definitely there. For instance there is a lot of talk in Congress about sub-prime bailout and allowing Fannie Mae to buy more MBSs. Nominally this may come under fiscal policy, but this of course affects the Federal Reserve in various ways. -raghu.
